Starting October 15, merchant payments made through the Unified Payments Interface (UPI) above Rs 2,000 will attract a merchant discount rate (MDR) of 0.4 per cent, the National Payments Corporation of India (NPCI) announced on Tuesday.UPI will continue to be free for person-to-person (P2P) transactions, as will person-to-merchant (P2M) transactions of up to Rs 2,000, which make up for more than 95 per cent of total volume of UPI merchant transactions.The government said a nominal MDR of 0.4 per cent would be levied on person-to-merchant UPI merchant transactions above Rs 2,000. For payments worth Rs 75,000 and above, the MDR will be capped at Rs 300 per transaction.To counter criticism from the Opposition over the move, the government said the UPI MDR was structured significantly lower than fees charged on traditional card-based payments.“Standard credit card MDRs typically range from 1.5 per cent to 2.5 per cent per transaction, while debit card MDRs are capped at 0.9 per cent. By setting the UPI MDR at 0.4 per cent on transactions above Rs 2,000 and capping it at Rs 300 for high-value purchases, UPI remains the most affordable digital payment acceptance mechanism for merchants,” the government said, adding that the lower MDR would help businesses reduce payment processing costs while continuing to accept digital payments.Explaining the rationale for introducing MDR, the government said the UPI now processed billions of transactions every month and required sustained investment in infrastructure, cybersecurity, innovation, resilience and customer support.“The MDR is neither a tax nor a charge collected by the government or the NPCI. It is distributed among participants in the payments ecosystem, including banks and payment application providers, to support the operation and continuedexpansion of the UPI ecosystem,” the Finance Ministry said.The move effectively ends the zero-MDR regime that has been in place since 2020. Banks and financial institutions had flagging the system as financially unsustainable.The government said three categories would remain exempt from MDR — person-to-person transactions, merchant payments of up to Rs 2,000, and payments received by small merchants.“Small merchants, including street vendors receiving up to Rs 1 lakh per month through UPI QR codes under the P2PM category, will continue to enjoy zero MDR on all transactions. This provision will protect street vendors, neighbourhood shops and other small businesses from additional payment costs,” the ministry said.Officials said transactions above Rs 2,000 in essential and low-margin sectors, including railways, telecommunications, insurance, fuel and agricultural inputs, would attract a flat MDR of Rs 5 per transaction.“This will provide cost certainty for critical public services and businesses operating on narrow margins. Payments relating to mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02 per cent, capped at Rs 300 per transaction. The lower rate is intended to support continued retail participation in formal financial markets,” the officials said.The government also announced the creation of a dedicated fund to promote UPI adoption among small merchants. An amount equivalent to 5 per cent of total MDR collections would be allocated to the fund.According to the government, the fund would support wider UPI acceptance, sustained usage and greater inclusion of small businesses in India’s digital payments ecosystem.Government estimates suggest the new MDR framework will apply to only around 4 per cent of merchant transactions.The Centre also clarified that MDR was a charge within the merchant payments ecosystem and was not intended to be borne by customers.”Banks have been advised to ensure that merchants do not pass MDR charges on to customers. UPI application providers are expressly prohibited from imposing platform fees or hidden charges. Individuals will continue to enjoy unlimited free usage, with no monthly quotas, volume restrictions or tiered caps on free UPI transactions. Daily transaction limits prescribed by banks and the NPCI, generally ranging from Rs 1 lakh to Rs 5 lakh depending on the transaction category, are security and risk-management safeguards and not charging thresholds,” the ministry said.